Debt relief vs. credit counseling: Which is better?

Getting out of debt is a difficult process. While a debt consolidation loan can help streamline your bills into one monthly payment, sometimes you need professional help.

Debt settlement companies and credit counseling services are two popular options to help consumers climb out of debt. But they operate quite differently and have different requirements, fee structures and drawbacks.

Debt relief (or debt settlement) companies can negotiate with your creditors to lower your balances.

Typically, a minimum debt load of $7,500 or $10,000 is required, and only unsecured debt not backed by collateral is eligible. Most companies don't negotiate back taxes, but there are special tax relief companies that will.

Once enrolled in a debt relief plan, clients are usually instructed to stop making payments to their creditors and direct those funds to a special account. Once enough money has been set aside, the company will use those funds to negotiate settlements.

Your creditors are likely to keep reporting late payments during that phase, so interest and late fees will continue to pile up and your credit score will take a big hit.

In return, the average settlement amount is about 50% of the balance owed, according to the American Association for Debt Resolution. After they take their fee — generally between 15% and 25% of the amount enrolled — clients can save an average of 20% to 30%.

Debt relief companies also claim they can help clients get out of debt in 24 to 48 months, much faster than making regular minimum payments on high-interest debts would.

New Era Debt Solutions and National Debt Relief are two of our top picks for debt relief, based on customer service and debt requirements.

Credit counseling services are typically nonprofit, though they still charge for some services. A credit counselor will work with a client to draft a debt management plan that will hopefully lower interest rates and eliminate some fees. (In most cases, clients are instructed to close each card enrolled in the plan.)

From there, the client makes one monthly payment to the service, which will send funds to creditors on their behalf. There's a lot of emphasis on financial education, budgeting and figuring out how to avoid getting into debt again.

Unlike a debt settlement plan, though, you're still paying off what you borrowed in full. You'll avoid some of the negative effects on your credit, but your existing balance won't shrink.

Clients typically pay off their debts in three to five years, compared to two to four years with a debt relief firm.

Credit counseling tends to cost less than debt relief, although prices vary by state. In California, monthly fees are capped at 8% or $35 (whichever is smaller) plus an educational fee of $50.  

A reputable service will offer a free advice session and put its fees in writing. Check with your state attorney general's office or consumer protection agency to review its record.

Money Management International has a stellar reputation for customer service and claims that its plans can help clients get debt-free seven times faster than just continuing to pay the minimum balance. Apprisen is another top pick, with workshops on first-time homebuying, student loans, bankruptcy and more.

If you're sinking into debt, a debt relief company or a credit counseling service could be a lifeline. But they provide different services, have different fee structures and come with different pros and cons.

While debt relief programs require a minimum balance of either $7,500 or $10,000, there is no strict minimum debt amount for credit counseling.

Credit counselors can work with your creditors to lower your interest rate and remove some fees, but they won't be able to shrink your existing balance the way debt relief would.

Working with a debt relief company can result in your debt load dropping by as much as 50% and your balances getting cleared faster. But the fees can reach 25%, and the strategy can cause major damage to your credit score.

Credit counseling may make more sense if you have a reliable income and are making at least minimum payments on your credit cards and other bills, but need help chipping away at your balance.

Debt relief is a more drastic option, but it could be the better choice if you're unable to make minimum payments or have already defaulted.

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